In a 1999 paper on international drug price comparisons, Patricia M. Danzon and Michael F. Furukawa illustrate how much the choice of currency conversion method matters.

U.S. drugs are less expensive than all countries but France if a health purchasing power parity basket is used to convert. They are more expensive than in most other countries if a GDP purchasing power parity basket or current exchange rate method is used.

For the record, the authors conclude that cost differences were in line with national incomes. The U.S. had a more lightly regulated, competitive market structure. It had high prices for new originator products and high use of new products but stronger generic competition and higher generic shares. In the U.S., a relatively larger share of a drug’s price went to its manufacturer rather than to intermediaries. The U.S. regulatory structure also appeared “more favorable to innovation.”

Comments (21)

“The U.S. had a more lightly regulated, competitive market structure. It had high prices for new originator products and high use of new products but stronger generic competition and higher generic shares.”
That is the key point I think. U.S. drugs always have a good reputation of high quality.

The price differentials in Chile and Mexico were roughly five times their income differentials. The authors conclude from that, and other evidence, that those countries have relatively high drug prices.

Of course, when buying prescription drugs in other countries one has to pay attention to the supply chain. An estimated 50% of the prescription drugs circulating in Africa are counterfeits. In Mexico, estimates say that counterfeits make up 12% of the prescription drug market.

I love John Goodman’s post, but he is all wet here. A Ford, or I Phone, or Mac is not cheaper in another country because of any PPP conversions, GDP PPP conversions or nation income differences. Taxes, regulation, and distribution network matter, but you buy a Ford, they want local currency sufficient to convert to same dollars as if they sold the car in US, because they have to pay their workers, and pay other expenses in dollars.
Drugs are cheaper in another country because of price controls. And because of that US consumers subsidize consumers in other countries. End of story.

Hmm: You have responded to a discussion of a scholarly paper with unsupported assertions. Ford does not pay its workers in Mexico or Great Britain in U.S. dollars. It pays them in local currency.

I confirmed Danzon’s findings when I used her method to examine Rx price differences between Canada and the U.S. I also looked at the change in prices over time, and compared them to other goods that have low marginal costs of production (such as Microsoft software).

The results were clear: Differences in national income are the primary factor in price differences, and this is more so when variable costs are a small share of total costs.

The paper was written in 1999. Nevertheless, I agree that the European Medicines Agency is more productive than the FDA. (I’ve written about this, especially a paper called “Leviathan’s Body Count” published by Pacific Research Institute.)

However, the “regulatory regime” includes not just the licensing bureaucracy, but also patent law, which is more protective of innovation in the U.S.; and efficiency of R&D. Many scholars credit the Bayh-Dole Act, which incentivizes university researchers to collaborate with industry, with having increased U.S. pharmaceutical innovation.